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Reliance Infrastructure - Delhi Airport Metro operations terminated - Edelweiss
Posted On : 2013-07-04 21:21:36( TIMEZONE : IST )
Reliance Infrastructure (RELI) has served a termination notice to Delhi Metro Rail Corporation (DMRC) for the Airport Express Metro, citing material breach of the concession agreement. The legal complexities involved in the case have led us to eliminate the project (valued at INR72/share) from our valuations. Maintain 'BUY' with a revised target price of INR511/share (INR583 earlier) on inherent asset value.
Delhi Airport Metro operations terminated
Operations of the Airport Express, starting today, have been taken over by DMRC from RELI. The metro rail runs between New Delhi and Dwarka stations via the Delhi Airport.
Project was mired in litigations
The 23-km Airport Express line was commissioned in 2011. Of the overall project cost of INR58.0bn, ~INR29.15bn was provided by the government as a grant; RELI had funded the balance INR28.8bn cost (70: 30 debt / equity). Last year, issues with respect to civil infrastructure cropped up, due to which the line had to be closed for around seven months to carry out major repairs. Early this year the operations were restarted, but the speed continued to be less than optimal. The traffic, which had reached ~25,000/day, is currently at ~10,500/day. Due to various litigations, the project was already under arbitration. RELI had raised a claim of ~INR8bn due to loss of revenue and reputation, agent fees and loss of profit due to the stoppage of work during the seven months of repair.
Outlook and valuations: Substantial asset value; maintain 'BUY'
As per the concession agreement terms, if RELI is found to be at fault, the government will take over the project by paying RELI 80% of the debt. On the other hand, if DMRC is proved guilty, RELI will receive ~INR31bn (100% of debt and 130% of equity). Since the project had a sizeable real estate parcel, we had assigned ~INR72/share value to it (metro + real estate). Considering the complexities involved in settling the case, we currently reduce the value of Delhi Metro to zero. However, considering the sharp correction in the stock price amidst significant cash + investment book and steady power distribution operations, there is inherent asset value in the stock. Hence, maintain 'BUY/Sector Outperformer' with revised target price of INR511/share.
